Cashing Non-Customer Payroll Checks for Business

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Question:

I am questioning the below scenario. I have heard from more than one of my business customers that this is common practice at other financial institutions: A large business customer, who just so happens to have his payroll account at another financial institution, wants his employees (non-customers) to be able to cash their payroll checks (drawn on another financial institution) at your bank. Is this something that is done commonly? Does the bank have any legal recourse in the event a payroll check is returned? Could we exercise a right of offset from the accounts the business customer does have with the bank even though it’s not the account the check is drawn on?

Answer:

The bank's only recourse for a returned check in this situation is against the non-customer who cashed it. That being said, some institutions have written agreements with the commercial customer granting the bank the authority to charge returned items back against the business account. If your bank chooses to enter into such an agreement, it is a good idea to have bank counsel review it to ensure that it would hold up if challenged in court. Also make sure of what the agreement covers. For example, does it only cover checks returned as NSF, or will it also include stop payments, signature forgeries, or endorsement forgeries? The bank will have decide if this customer relationship is worth the risk, and also possibly take the opportunity to cross sell its own payroll account services.

First published on BankersOnline.com 9/19/11